ORDERS:
FINAL ORDER
STATEMENT
OF THE CASE
This
matter is before the Administrative Law Court (Court of ALC) pursuant to Petitioner
Noel Glasgow’s (Petitioner or Taxpayer) request for a contested case hearing pursuant
to S.C. Code Ann. §12-60-450 (Supp. 2007). The issue presented to the Court is
whether the Respondent South Carolina Department of Revenue’s (Department)
determination for the tax year 2006 should be sustained. After timely notice
to the parties, this matter was heard on June 12, 2008 at the offices of the Administrative Law Court in Columbia, South Carolina.
FINDINGS OF
FACT
Having
carefully considered the testimony and the arguments of both sides taking into
account the credibility of the evidence and witnesses, I find by a
preponderance of the evidence:
1. Petitioner
is a South Carolina resident residing at 787 Mulberry Drive, Orangeburg, South Carolina.
2.
In February 2007, Petitioner filed a timely 2006 South Carolina income
tax return electronically.
3. Petitioner’s
original 2006 return reported a $100,000.00 South Carolina Educational Lottery
jackpot as income. Petitioner did not report any other South Carolina lottery
winnings as income.
4. On
February 9, 2007, Respondent sent taxpayer a letter requesting documents
substantiating various itemized deductions on his Schedule A, including
$71,391.00 in wagering losses from the lottery.
5. In
response to the letter requesting documentation, Petitioner met with the
Department at its headquarters and presented two suitcases full of South
Carolina Educational Lottery Tickets. Petitioner later submitted purported affidavits
from retailers who had sold him the losing lottery tickets. Petitioner drafted
the affidavits, filling in the dates and ticket amounts, and presented it to
the individuals to be endorsed. The Department deemed the statements
unreliable after unsuccessfully trying to locate the individuals who signed the
affidavits.
6. On
February 20, 2007, the Department adjusted the Petitioner’s return and issued a
proposed assessment disallowing the following deductions claimed on Schedule A:
gifts, taxes, and wagering losses.
7. On
February 23, 2007, taxpayer filed an amended return for the tax year 2006 claiming
the following: (1) an exclusion from taxable income of $23,717.00 and (2)
wagering losses.
8. By
letter dated June 21, 2007, Petitioner advised Department of an additional
$17,500.00 of wagering winnings received from the Lottery.
9. On
February 20, 2007, the Department issued taxpayer a proposed assessment which
disallowed the following deductions as “unsubstantiated:” (1) Charitable gifts
in the amount of $2,100.00; (2) Personal property taxes in the amount of
$499.00; and (3) Wagering losses in the amount of $71,391.00.
10. The
notice of assessment issued by the Department included an adjustment of
$28,504.00 as an addback to the petitioner’s income from the Health Care
Employees Pension Fund. On March 6, 2006, however, the Department issued a
revised notice of assessment which allowed Petitioner $3,000.00 as Petitioner’s
allowable retirement income deduction.
11. The
Department issued a Department Determination to Petitioner on February 22,
2008. Petitioner timely protested the proposed assessment and requested a
contested case hearing on March 19, 2008. Petitioner contends that he has
substantiated the aforementioned deductions and should be allowed to claim each
of them.
CONCLUSIONS
OF LAW
1. The Administrative Law Court has subject matter jurisdiction over this
action pursuant to S.C. Code Ann. § 12-60-450 (Supp. 2007).
2. Deductions
from gross income are not a matter of right, but are a matter of legislative
grace. A taxpayer claiming a deduction must bring himself squarely within the
terms of the statute expressly authorizing it. Southern Weaving Co. v.
Query, 206 S.C. 307, 34 S.E.2d 51 (1945); Fennell v. South Carolina Tax
Comm., 233 S.C. 43, 103 S.E.2d 424 (1958); Adams v. Burts,
245 S.C. 399, 140 S.E.2d 586 (1956). Further, in M. Lowenstein & Sons
v. S.C. Tax Commission, the South Carolina Supreme Court held that deduction statutes “are not to be
liberally construed.”
3. The
burden is always on the taxpayer to prove that he is entitled to the deductions
claimed on his return. Welch v. Helvering, 290 U.S. 111 (1933).
4. All
of the deductions at issue are deductions provided for by the Internal Revenue
Code (“IRC”). South Carolina adopted the applicable IRC provisions for the
year at issue, 2006.
Thus, the IRC and supporting authority, as well as South Carolina law, are
controlling in any determination as to the propriety of taxpayer’s deductions. Petitioner
has not provided adqequate documentation to support all deductions taken on
Schedule A of his SC 1040. Petitioner has also failed to meet the record
keeping requirements for deductions for cash and non-cash contributions required
under the IRC.
5. IRC
§ 170(f)(8)(A) provides that an individual taxpayer may deduct a contribution
of $250 or more only if he substantiates the deduction with a contemporaneous
written acknowledgment by the donee that meets the requirements of that
section. Addis v. Commissioner, 118 T.C. 528,
533-534 (2002); Berry v.
Commissioner, T. C. Memo. 2003-331; Stussy v.
Commissioner, T. C. Memo. 2003-232; see also Weyts v.
Commissioner, T. C. Memo. 2003-68 (discussion of legislative history underlying
the enactment of § 170(f)). The written acknowledgement must describe the
property contributed, indicate whether the donee organization provided any
goods or services in consideration for the contribution, and provide a
description and good faith estimate of the value of any goods or services
provided by the donee organization. IRC § 170(f)(8)(B); Treas. Reg.
1.170A-13(f)(2).
6. Petitioner
has not complied with the requirements to substantiate the contribution
deduction. At trial, Petitioner submitted a handwritten list of items which he
stated that he had donated to charity. However, the alleged (and unnamed)
donee organization can neither confirm that taxpayer actually contributed
items, nor give a good faith estimate of the value of the items allegedly
donated. Without such a written acknowledgment, the contributions cannot be
substantiated and the statute precludes taxpayer from deducting the disputed
amounts as charitable contributions.
7. IRC
§ 61 defines “gross income” as all income from whatever source derived. Commissioner
v. Glenshaw Glass Co., 348 U.S. 426 (1955). Lottery proceeds are clearly
within the purview of this general definition. Thomas v. Commissioner,
64 T.C.M. 955 (1992). Anastasio v. Commissioner, 67 T.C. 814 (1977), affd.
without published opinion, 573 F.2d 1287 (2nd Cir. 1977). The lottery
winnings of $100,000 and $17,500 received by taxpayer in 2006 are thus “gross
income” and are taxable by the State.
8. IRC
§ 165(d) (2006) permits a deduction for “[l]osses from wagering transactions”
but “only to the extent of the gains from such transactions.” Lottery gains
and losses are considered “wagering transactions” under IRC § 165(d), and are
thus subject to the limitations set forth therein. Tech. Adv. Mem. 9808002
(Oct. 24, 1997). Further, under § 12-6-560, “[a] resident individual's South
Carolina gross income, adjusted gross income, and taxable income is computed as
determined under the Internal Revenue Code. . . .” Thus, in order for taxpayer
to deduct his claimed wagering losses for tax purposes, he must maintain
sufficient records to substantiate his claim for a deduction as provided by IRC
§ 165.
9. While
there are no specific statutory requirements for substantiating wagering
losses, IRS Revenue Procedures and several federal cases provide recordation
the IRS and courts have accepted and/or rejected in specific situations.
Revenue
Procedure #77-29, 1977-2 CB 538. “Provide[s] guidelines to taxpayers concerning
the treatment of wagering gains and losses . . . .” The Revenue Procedure
suggests that taxpayers should maintain an “accurate diary or similar record”
that contains the “date and time of specific wager or wagering activity; name
of gambling establishment; address or location of gambling establishment;
name(s) or other person(s) (if any) present with taxpayer at gambling
establishment; and amount(s) won or lost.” Id. For lottery tickets, the IRS recommends that the
taxpayer provide “a record of ticket purchases, dates, winnings and losses.
Supplemental records include unredeemed tickets, payment slips and winning
statement.” Id.
10. The
Petitioner failed to present to the Court the requisite records to substantiate
wagering losses of $71,391. Petitioner presented thousands of lottery tickets
in order to substantiate his $71,391 deduction claim, but failed to present a
contemporaneous log of purchases or provide an accounting of his losses or
gaming winnings. The Department has been unable to confirm that the tickets
presented are losing tickets, or even that the tickets were purchased by the
Petitioner. Given the IRS’s strict standards for using letters as a method for
substantiation, unverified affidavits from store clerks will not be allowed to
substantiate the deduction claim. The “Affidavits” are not in proper form. On
each affidavit, Petitioner Noel Glasgow signed as “Deponent,” and the
individuals from whom he obtained these statements are referred to as
“witnesses.” Moreover, the statements were not properly moved nor admitted
into evidence. ALC Rule 8(A) provides that “a party proceeding without legal
representation shall remain fully responsible for compliance with these rules
and the Administrative Procedures Act.” Thus, these statements, unsupported by
any testimony from the individuals giving the statements, are inadmissible.
Petitioner also presented the testimony of Mrs. Penny Fine, who corroborated
the fact that he spent large sums of money on the lottery, both winning and
losing. Mrs. Fine, however, could not produce any journals or logs that would
rise to the level of substantiating the wagering losses.
11. Taxpayer’s
income from Health Care Employees Pension Fund in the amount of $28,504 is
includable in South Carolina taxable income. S.C. Code Ann. § 12-6-1140 (2000)
provides:
§ 12-6-1140.
Deductions from individual taxable income.
There is allowed as a deduction in computing South Carolina taxable income of an individual the following:
* * *
(4)
amounts included in South Carolina gross income received for disability
retirement due to permanent and total disability by a person who
could qualify for the homestead exemption under Section 12-37-250 by reason of being
classified as totally and permanently disabled;
(Emphasis
added) In order to exclude disability retirement income, a taxpayer must show
that he is receiving such income because he is “permanently and totally
disabled.” Petitioner has failed to produce any information which would
substantiate a finding that he is permanently and totally disabled. Petitioner
was gainfully employed during the year 2006 by Richland Community and received
wages of approximately $17,536 for his services rendered. Petitioner did not
substantiate “permanent and total disability” such that the retirement pension should
be excludable under South Carolina law. By way of example see, Anonymous Taxpayers v. S.C. Dep’t of Revenue, Docket No. 00-ALJ-17-0203-CC (August 25, 2000)
(“Petitioner's disability did not render him totally and permanently disabled. Petitioner
became employed approximately eleven months after he was terminated from
Corporation, and he is still employed”).
ORDER
IT IS HEREBY ORDERED that the findings contained
within the Department’s determination be upheld.
AND IT IS SO ORDERED.
___________________________________
Carolyn
C. Matthews
Administrative Law Judge
July 31, 2008
S.C. Code Ann. § 12-6-560 (2000) (“A resident individual’s South
Carolina gross income, adjusted gross income, and taxable income is computed as
determined under the Internal Revenue Code . . . .”).
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